Far from being a fault of capitalism, this is largely the fault of government. Huge deficit spending, promoting the idea that we are all ‘entitled’ to a comfortable living, federal loan guarantees that reduce the risk of banks to lend money, government bailouts and subsidies of stupid plans and high risk ventures. Bankruptcy laws that give bad behaviour a fair bit of protection. Safety net programs which reduce the potential downside of economic disaster. Guaranteed pensions and social security which eliminate the need to save, and in some cases punish it.
The list goes on. The government screwed the pooch with the Savings and Loan industry in the 1980’s, gave them so many protections that they kicked off the largest con in history, and then bailed out the people who invested in them, thus removing any penalties they might have suffered for making high-risk investments in S&Ls instead of safe blue-chip or bond holdings.
And you wonder why people are overextending themselves and not saving money?
Then governments make it worse by doing the same stupid thing they are doing right now - they throw money at the problem, often in areas which do no good at all as a stimulus, because they just see the recession as an opportunity to buy votes and the money get sprayed willy-nilly to the people who have the most political clout.
And they tend to get out of phase with their Keynesian pumps. For instance, it now looks to me that George Bush’s tax cuts and ‘stimulus’ took effect just as the economy was starting a recovery anyway. So instead of acting as an anti-cyclic reinvestment to smooth the business cycle, it becomes positive reinforcement. So you get a boom, high profits, speculation, and all the nastiness of an overheated economy. Which makes the next collapse worse, and the government in even more debt. Once they lose the option to borrow more to keep the whole scheme afloat, you’ll have a REAL crash. Maybe not Argentina-bad, but maybe 1970’s bad - double digit inflation and interest rates, 10% unemployment.
Business is far better capable of handling the fluctuations of the market than is the government. My company has been warning us of slowdowns coming up for at least three quarters now. The market is already adjusting to this. Production will ease, spending will be re-prioritized in firms across the country. Belts will be tightened. There will be some pain - layoffs, projects canceled, non-performing business units sold off or shut down. That’s why it’s called a recession. But it’s necessary. You have to correct the imbalances.
Government does not seek to do that. It makes the problem worse by throwing money at the economy, which just reduces the incentive to do the hard things that must be done. People learn they don’t have to save for a rainy day, because if hard times come the government checks will flow.
The clowns in Washington are about to throw 210 billion dollars of borrowed money at the economy as a ‘stimulus’. But after the House and Senate managed to knead the billy like taffy to get their pork and political favors into it, everyone from disabled veterans to seniors get a payout. Yes, giving seniors money is sure going to stimulate the economy, huh? The only thing it’s going to stimulate is their bank accounts, because they’re not going to spend it. And disabled veterans? Wha? Look, I like to help disabled vets too, but how in hell could you possibly call this a ‘stimulus’ package? What is there about disabled vets that gives you a better stimulus bang for your buck than say, giving it to young families or providing investment tax credits and subsidies? Or even by providing things like job retraining services if the unemployment rate starts to increase?
Anyone who thinks government can operate efficiently should have a good look at this ‘stimulus’ package. They would have done about as much good had they just thrown darts on a map and dropped a helicopter load of cash at each location. They make things worse, not better.